Berlin must refuse Arcandor credit note
Arcandor’s chief Executive Karl-Gerhard Eick has warned that if his department store group is forced into insolvency, it will do to the retail sector what the collapse of Lehman Brothers did to finance. It is hard to know whether Eick really believes this, although one has to hope he does not.
The German government, at whom this hyperbolic claim is directed, should certainly block its ears. It may be tempting to step in to help a company that employs 53,000 people in Germany so close to an election, and the SPD half of the governing coalition has been pushing hard for a helping hand to be extended. But there is simply no justification for government assistance in this case.
The state should not intervene in a situation where there are more than enough assets to meet the debt repayment of 710 million euros ($1.01 billion) being demanded by Arcandor’s lenders — Royal Bank of Scotland, Commerzbank and BayernLB. There is also a further 250 million euros due in September, but this could also be covered.
Arcandor had gross debts of 2.36 billion euros at the end of December 2008. With an around 52 percent stake in Thomas Cook — worth some some 1.15 billion euros — and its net cash of 776 million euros alone, the break-up value of the group excluding Karstadt and Primondo brings it close.
In its 2008 annual report, Arcandor observes that all its loans have been backed by collateral worth 3.5 billion euros. If that is the case, it is hard to see what the lenders are worried about — even taking into account the decline in asset values.
Arcandor’s gripe seems to be that the requirement to repay its debts may force it to sell off some of the more valuable bits of the troubled retail conglomerate — in particular its Thomas Cook stake — at a disadvantageous time.
But it is not the state’s job to protect companies from the consequences of contracts freely entered into. In any case, the stake is worth more than enough to repay the bank debt of 960 million euros.
The group’s problems stem partly from its 4.5 billion euro sale in 2006 of Karstadt’s real estate, which it then rented back. While wiping out its debt for a short period, this left it exposed to rental costs, reducing its flexibility.
It then sought to build up Thomas Cook, which in 2007 took over Europe’s third largest tour operator MyTravel. Arcandor, as the previously named KarstadQuelle had become, was once again in debt as it chased what it thought were high growth markets.
Eick shouldn’t be trying to shovel the problem onto the government’s lap. He has various options he should be pursuing. True, the Karstadt stores business is (as ever) struggling. But the first port of call must be to try to merge it with a rival.
Not only is German retailer Metro keen to push its Kaufhof department stores together with Karstadt, Arcandor has also had interest from a handful of potential buyers for its premium department stores.
Even parts of Arcandor’s ill-fated home shopping business Primondo have attracted interest from privately owned mail order group Otto.
It is not in the interest of the consortium that owns Arcandor’s property portfolio — the so-called High Street group led by Goldman Sachs — for the group to collapse. Eick should persuade them to chip in to keep as much of the store empire intact. After all, there may be no easy alternative use for these stores.
Eick is playing a dangerous game in pushing right up to the line for state aid rather than restructuring the group. He says Arcandor won’t be rushed into a decision on selling assets, but with a June 12 deadline for renewing credit lines fast approaching, he is in no position to dictate terms.
This is an opportunistic attempt to mug the German taxpayer and should be resisted.
— At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.
(Editing by David Evans)